DE vs. CAT: Which Heavy Machinery Stock Is the Better Buy?
Stock Analysis & Ideas

DE vs. CAT: Which Heavy Machinery Stock Is the Better Buy?

Story Highlights

Tumbling multiples in the machinery industry appear to have created some buy-the-dip opportunities in the sector. Thus, a closer look is warranted for Deere and Caterpillar to determine if the pessimism in those names is deserved or overdone.

In this piece, I evaluated two heavy machinery stocks, Deere & Co. (NYSE:DE) and Caterpillar (NYSE:CAT), using TipRanks’ comparison tool to see which is the better buy. A closer look suggests bullish views for both companies, although a clear winner still emerges from this pairing.

Deere manufactures and sells a variety of equipment for use in agriculture, forestry, and construction. Meanwhile, Caterpillar manufactures construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives.

Deere shares are up 5% over the last three months and down 4% over the last 12 months. Meanwhile, Caterpillar stock has soared 38% over the last three months, pulling its one-year return into the green at 33%.

After Caterpillar’s sizable rally over the last few months, it’s trading at a significant premium to Deere. We’ll compare their price-to-earnings (P/E) ratios to gauge their valuations against each other and against that of their industry.

As a starting point for the valuation discussion, the U.S. machinery industry is trading at a P/E of 20.6 versus its three-year average P/E of 24. Importantly, Deere’s and Caterpillar’s business mixes are actually tilted in slightly different directions within the overall machinery industry (more on that below).

Deere & Co. (NYSE:DE)

At a P/E of 11.2, Deere is trading at a discount to its industry and to Caterpillar. As such, positive earnings trends and insider buying activity suggest a bullish view might be appropriate, especially given Deere’s long-term share-price appreciation.

Deere shares are up 161% over the last five years and 445% over the last 10, making this stock an attractive buy-and-hold position. Additionally, a deeper dive into its valuation reveals even more reasons to like this stock.

Deere’s P/E of 11.2 is actually in line with that of the agricultural end of the machinery industry, which is trading at a P/E of 10.6. However, the agricultural machinery industry’s three-year average is 18.8, which suggests Deere will have significant room to run once the market shakes off this pessimism.

In fact, the pessimism seems unwarranted due to the current earnings trends for Deere and the industry. The company reported record revenue for Fiscal 2023, coming in 16.5% higher year-over-year at $61.25 billion.

Deere’s earnings per share also notched a record high at $34.63 per share. Additionally, the company raised its guidance multiple times last year despite the soaring interest rates, indicating significant demand despite the economic uncertainty.

Deere is set to release the earnings results for its first fiscal quarter on February 15. The consensus is currently calling for adjusted earnings of $5.25 per share on $10.3 billion in revenue.

Finally, a review of insider trading activity in Deere shares reveals some interesting activity. There were a significant number of Auto Sell transactions two months ago, but they’re paired with what looks like an equal number of Auto Buy transactions.

Additionally, each Auto Sell transaction appears to be a fraction of the Auto Buy transaction it’s paired with. Thus, it appears that insiders could be bullish on Deere, and at the current valuation, it’s easy to see why.

What Is the Price Target for DE Stock? 

Deere has a Moderate Buy consensus rating based on 11 Buys, eight Holds, and zero Sell ratings assigned over the last three months. At $428.11, the average DE stock price target implies upside potential of 10.9%.

Caterpillar (NYSE:CAT)

At a P/E of 18.3, Caterpillar is also trading at a discount to its industry, although its valuation is higher than Deere’s. However, long-term trends and share-price appreciation suggest a bullish view may be appropriate, even after the sizable rally over the last three months.

Comparing Caterpillar’s valuation to the construction end of the machinery industry reveals a similar situation to what we saw with Deere. The construction machinery industry is trading at a P/E of 17.5 versus its three-year average of 21.8, which suggests more upside for Caterpillar shares once the pessimism lifts.

Of course, the big news for Caterpillar this week has been its sizable earnings beat. The company reported adjusted earnings of $5.23 per share and $17.1 billion in revenue for the fourth quarter versus the consensus estimates of $4.76 per share and $17.06 billion in sales.

Caterpillar especially impressed investors with its profit margins. Its operating profit margin soared from 10.1% in the fourth quarter of 2022 to 18.4% in the recently completed fourth quarter. On an adjusted basis, Caterpillar’s fourth-quarter operating profit margin was 18.9%, up from 17% in the year-ago quarter. For the full year, the company’s operating profit margin was 19.3% versus 13.3% in 2022.

Finally, a review of Caterpillar’s long-term share-price action suggests this stock could be an attractive buy-and-hold position. CAT stock is up 172% over the last five years and 339% over the last 10.

What Is the Price Target for CAT Stock? 

Caterpillar has a Moderate Buy consensus rating based on eight Buys, eight Holds, and two Sell ratings assigned over the last three months. At $307.94, the average Caterpillar stock price target implies downside potential of 4.84%.

Conclusion: Bullish on DE and CAT

While Deere and Caterpillar both receive bullish ratings, Deere is the clear winner here because its stock appears to have more upside than Caterpillar’s. In fact, the company’s valuation makes it too cheap to ignore, especially considering its positive earnings trends and the recent de-rating in the agricultural machinery sector.

Meanwhile, there is still a bull case for Caterpillar stock, even after the recent surge. However, that rally does suggest there might not be quite as much upside for the company compared to Deere.



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